Question

1) The efficient market hypothesis states that:

• markets currently contain an efficient amount of information for them to clear.

• in order for markets to be efficient they need to be adequately regulated.

• when buyers and sellers act in their own best interest markets will be efficient.

• markets currently contain all available information and correctly value instruments.

2) An increase in the expected future price of inputs will cause:

• the long-run aggregate supply curve to shift to the left.

• the short-run aggregate supply curve to shift to the left.

• the aggregate demand curve to shift to the right.

• a movement rightward along the short-run aggregate supply curve.

3) A saver can eliminate _______ risk through ________________.

• idiosyncratic; diversification

• idiosyncratic; asset valuation

• systemic; asset valuation

• systemic; diversification

4) Which of the following would cause the money demand curve to shift to the left?

• An increase in GDP

• A technological advance, like online shopping

• An increase in interest rates

• Inflation

Answer 1

Answer 1 Markets currently contain all available information and correctly value instruments.

Explanation of correct option- The Efficient Market Hypothesis is a hypothesis related to the financial markets. The hypothesis states that market contains all the the available information and hence it is impossible to beat such markets on a risk-adjusted manner. Predictions in such markets are very difficult.

Incorrect options

Other options do not state the proper definition of Efficient Market Hypothesis. Only the last option (correct option) gives the proper statement of the hypothesis.

Answer 2- The short run aggregate supply curve shift to the left.

Explanation of correct option- Shifts in short run supply curve depends upon factors such as cost of production and wages. As expectation of future increase in input prices is there, the short run supply curve will shift to the left due to fear of losses.

Incorrect options-

Long-run aggregate supply option is wrong because long sun aggregate supply does not depend upon input prices, but it depends upon factors affecting long run economic growth such as increase in investments and capital stock.

Aggregate demand curve does not depend upon input prices because demand is relate to income, taste and preferences of consumers. Movement in supply curve is due to shifts in demand and not due to input price change.

Answer 3 A saver can eliminate idiosyncratic risk through diversification.

Explanation of correct option- Idiosyncratic risk is also called as un unsystematic risk is a risk which is associated with investment in a particular asset. It can be easily avoidable by diversification. This risk is limited to the saver or investor and cannot affect the whole business or the company.

Incorrect options-

Systemic risk are the incorrect option because such risk can break down the entire system and cannot be avoided by any means. It leads to severe economic downturn.

Asset valuation is incorrect because it cannot help in avoiding idiosyncratic risk.

Answer 4- An increase in interest rates.

Explanation of correct option-An increase in interest rates implies higher returns on bonds. People will be attracted to buy bonds instead of holding money. Thus, an increase in interest rate causes demand for bond to rise and demand for money to fall. As a result, the money demand curve shifts to the left.

Incorrect options-

Increase in GDP will shift money demand to right as people will now demand more money to for transaction purpose i.e. to buy the increased GDP.

Technological advancement has nothing to do with shifting money demand curve to left. Instead it will shift to right as people will require more money for online shopping.

Inflation will not shift money demand to left because during inflation people need more money to cope with the rising prices.